Guest Post: The Hydraulic Fracturing of Saudi Arabia...

Since the early twentieth century, Saudi Arabia has enjoyed a close relationship with the United States. From the development of the Saudi oil fields,to the First Gulf War, this relationship has been an uneasy cooperation—each side received something out of the alliance while nervously watching the other. So recently we have the first open break between the two powers culminating in the Saudi’s refusing a seat on the U.N Security Council due to anger with U.S. Middle Eastern policies.

Saudi Arabia holds the world’s second largest oil reserves and the sixth largest natural gas fields. In addition to being located in the most volatile part of the world, these energy assets make the country a strategic interest for any global power.

The discovery of vast hydrocarbon reserves in the United States and the ability to harvest them through hydraulic fracturing techniques has radically altered the relationship between the two countries. Ironically, even though the Obama administration has reduced drilling on Federal lands in the US and attempted to curtail hydrocarbon use overall, it is fracking which has allowed the United States to nearly gain energy independence, become a net energy exporter again, and reduced the need to buy oil from the Middle East. This shift in the balance of power with the Saudis has made the Kingdom extremely nervous.

American policy adds to the Saudi’s concerns. The Saudi oil fields, located in the eastern part of the country, are the home to the country’s Shia minority. As the guardians of the holy Muslim sites, the royal family walks a fine line between satisfying the Sunni Ulema, fighting terrorism, and keeping the Shia population in check. Hence, their concern with America’s recent overtures to Iran.

The Obama administration has been Hell bent to secure a deal with the Shia Islamist state regarding its development of nuclear weapons. Now that the deal is in place, the Iranians are openly taunting the West with shouts of victory rather than assuring the world they have no intent to join the nuclear club. John Kerry and his Dept of State have been either naive, weak, or both when it comes to negotiating with the mullahs. The Saudis, along with the Israelis and other Gulf states, cannot tolerate a nuclear armed Iran. There are rumors that Saudi Arabia has paid Pakistan for the development of its own nuclear deterrent and is one month away from operational capability if they saw fit.

In addition, the Kingdom is furious with U.S. refusal to arm Sunni rebels fighting the Iranian backed Syrian regime. The uneasy trust between the U.S. and Saudi Arabia has been broken. This opens up the playing field for other global powers such a China or Russia to make inroads where the U.S. once enjoyed hegemony. It also opens up the world to a possible nuclear arms race in the Middle East. In fact, this is already happening in Egypt, another broken U.S. relationship, who just closed a major arms deal with Russia in a slap in the face to the Obama Administration’s decision to cut military aid. China would like nothing better than to gain access to a secure source of Saudi oil and strategic American built bases as well.

There have been calls from many quarters for the U.S. to mend fences with Iran in order to prevent a conflict and counter the Sunni influence in the region. It seems obvious that for this to happen, Iran needs to show real progress in addressing the world’s fear that they intend on acquiring the bomb and have plans to use this threat to destroy Israel and/or the interests of the United States. But alas, this will probably not happen with the current Iranian government.

It is foolish for America to offend and promote distrust with another ally in a long list of broken long-standing relationships. These include Poland, United Kingdom, Israel, Egypt, etc. One wonders whether the results of American diplomacy stems from extreme incompetence or is evidence of a much darker agenda.

Gosh, golly, gee...Regardless of who is doing what to whom to fuck things up, as it's happening just peachy fucking keen, neato, couldn't be done better, the KSA and Emirates will start siding with "somebody else" as our relationships (Which had been promised to become sterling with the whole world, I remind you, holding hands and singing Kumbayah in harmony.) shrivel like Babe the Blue Ox's nuts when immersed in Lake Michigan at -37 below ..... we're not gonna just loose their alliance, we're gonna never ever be able again to get their attention.Imagine, we'll just give them all red plastic reset buttons and all will be well.

Hey, someone(s) decided "democroceee" was the way to go instead of the rule of law. Where people can vote to pillage their neighbor while not even being able to name their rep at the federal, state or local level.

It wasn't me, "they deserve to get it good and hard" I'll just stand out of the way and watch ;-)

One of those 536ers, in 2012, was caught open mic telling the Russian premier that he would have more flexibility after the election. That language about high crimes in the stone cold dead version of the constitution should've applied. Thanks MSM. Thanks 60's march-through-the-institutions true believers. So much for your pensions

I say we are at ALL TIME HIGHS in total fucking incompetence, hubris, and just plain stupidity in our government. I mean just look at this crew: Community Organizer Obomba, village idiot Biden, Lurch Kerry, Hilary the wicked witch of the West, Susan Rice (coiner of the term "humanitarian bombing"), Sibelius the wonderful architect of our health care woes, Samantha Powers at the UN, know-nothing Berkeley-ite, fucking Jack Lew at Treasury, Eric "Place" Holder...the list is just endless. Not that the Repubs are covering themselves with their glorious bench team either. Makes me long for the days of Gerald Ford or something...at least you had a 50% chance he would not COMPLETELY BLOW THE SHOT

a very bad article that is light on substance, high on speculation and weak on ZOG bullshit.

1. Carbonate's in Saudi Arabia are some of the oldest wells on studied record. Some of the first Acid Jobs and "fracs" were on Saudi wells

2. Very little exploration has been done inside Saudi Aramco since 1978. They had no need to do this.

3. Saudi oil laws do not allow for foreign SOE's or Upstream companies from booking reserves or barrels for trade. Everything is done on management agreements of the fields or assets, which is why exploitation or new seismic and oil companies have never bothered to negotiate in the heavily lopsided deal table in Saudi. This will likely change in the next 5 years since Kingdom Holdings is well aware without help, and advanced seismic shoots the country of Saud can not continue to produce at this pace.

4. No production = no growth, and the high leverage blowing up Dubai is well understood by the Crown Prince.

5. The security negotiations are in no way related to natural resource investment or SaudiAramco negotiations. Story editor and the author need a way better oil sources & feeder articles.The ability to mis-educate and misdirect natural energy investors on ZH is way to great. A good brand can become shit overnight if the stories start to go off the rails and/or journalistic integrity is put at risk by ignorant articles.

It is part of a much darker agenda. The US knows that eventually the Saudis will want their trillions out of our banks and the UK banks. So while they have this frakking and is becoming energy dependant they can start to troll the terrorists thing onto the Saudis and eventually tie them to terrorism and when we have regime change, we won't have to pay those trillions out.

Also this frakking is costing the US much in fresh water. Most of our water is becoming irreputable contaminated and we still aren't seeing it.

tigh oil wells don't have the staying power to permanently suppant conventional forever. That being the case the neo lithic bronze age house of Saud with perhaps one exception, should be the first place on the globe for a nuke to fall.

Why? Because they are both the ideological home base and cash register for radical islam and the folks for whom the west purportedly fights a "war on terror" ( which is actually being successfully fought by syria despite the best efforts of the US and Saudi Arabia ).

I mean, it's his own shit, not shit from a bull, and he's more of a finger painter than an artist. That makes him a neocon that plays with his feces and smears it all over everything he touches, but that's pretty much the same thing.

"Ironically, even though the Obama administration has reduced drilling on Federal lands in the US and attempted to curtail hydrocarbon use overall, it is fracking which has allowed the United States to nearly gain energy independence, become a net energy exporter again, and reduced the need to buy oil from the Middle East."

So, just how close to energy independence and net energy exporter is America? Producing 51% of your oil doesn't make you independent.

"Iran needs to show real progress in addressing the world’s fear that they intend on acquiring the bomb and have plans to use this threat to destroy Israel and/or the interests of the United States."

Israel has attacked us more in the last 50 years than Iran (USS Liberty), despite the fact we destabilized Iran and put in the Shah, a little further back. Israel is also the biggest spy threat in the Middle East, not Iran, per the CIA. In addition, who are we to determine another country's interests, Team America World Police?

In addition, shale is in a bubble. This dude is like the guy screaming in 1999 to buy tech. Big fail.

Yeah, I bet the million Iranians killed under The Mullahs ( LLc ), including 12 year old boys given Chinese made plastic keys to heaven before being made to walk through mine fields would hate to have strongman ( snicker ) the Shah back. Good thing corruption is gone now.

When, if ever; was Iran "stable". Maybe when invading Greece.

Outside of war, the largest killer of servicemen, is the US Military.
I can think of off hand three instances during war were US mil has killed 2-500 at a time. I don't belive the Liberty story. Third world, poorly trained pilots, bad comnand, shoots up old ship.
US A-10 have shot up marked vehicles. F-16's shot down 2 ( two ) Blackhawks. Maybe they were Jew pilots

Machinations vs incompetents? You kmow, fog of war from that old german guy?
Oh, YOU read it on the internet....and a McCain supposedy did someting SO it must be true?

Even the then poorly equipped, poorly piloted Israili air force could of easily sunk the Liberty. So, motive Missy The Israili leadership at thevhigest level, during war, attacks but not to sink a US Navy ship to..to...FOOL which according to you..they didn't the US Navy? And then trick the restvof the Joint Chiefs, the White House, a Democrat President...of the one single country it depends upon?
That this was a plan?
That they not only acted but couldn't accomplish sinking a elderly cargo bucket?
Please. Which is it. Highest level machevelian plan done by superjews or fuk up?

Vs my opinion of Israli military as forth rate, maybe fith, that can bairly get its Army a hundred miles up a road, that has never fought any non slave, non turd world force.

Im on the fuk up

9/11?
Dick Cheney set the charges, running the stairs after hours, drilling the holes and tying the Dent cord..

You've gone full retard there I see. Why did Israel need USA to fight this war? Israelis destroyed Egypt's air force within an hour. Sinai peninsula was taken within a day and a half. Golan heights within a day. Syrian/Egyptian artillery and tanks destroyed/captured by the hundred. All courtesy of the IDF. No foreign involvement. Research the topic yourself if that would be too much to ask of you.

"Iran needs to show real progress in addressing the world’s fear that they intend on acquiring the bomb and have plans to use this threat to destroy Israel and/or the interests of the United States."

Just more propaganda BS for the gullible and naive. Even if Iran had ten nuclear warheads Israel has 200 or more and the US has thousands - do the math . . . . . what a few nukes would do for Iran is offer them some protection against things like "regime change" by the west.

The two political pillars of Pax Americana in the sacred oil patch, since 1945 Saud handshake, have been Wahhabist Kingdom and Zionist Jerusalem, to ensure its holy sanctuarisation by these surrogate Templars of the petrodollar game. (Imagine trying to use rabid Sunnis, those who spread the Sharia in MENA, to play the role of modern Templar allies).

How can you build a stable order in the region as your twin pillars of Hercules have as foundations two such antagonistic ideologies, incarnated by two clans who are totally into hegemonical, manic geostrategic plays to the detriment of their regional neighbours since 60 years; a political mindset that mirrors to a T the same mindset of its controlling universal empire oligarchs; its paymaster and bigstick holder?

Predatory divide and rule strategy that ensures a state of permanent wars like in Roman times.

Its been Dear Henry's machiavellian construct that these two antagonistic forces would pull together under the string pulling of its DC puppet masters in name of universal empire realpolitik. All it required was a bogeyman to be their common enemy. And that occurred when that third pillar in the region, Shah's Iran created into an artificial surrogate nation by 1953 takeover of that country, morphed into rabid Ayatollah land in 1979 revolution to become dire enemy to both camps and satanic USA (in their jargon).

Just like Metternicht's construct-- historical model/mentor of Dear Henry-- linking Austro-hungarians to Britannia in a continental alliance over a century after Napoleon's defeat at battle of Leipzig, it kept the French Ogre at bay--in this case of petrodollar hegemony of Dear Henry days, that part of ogre was played by the USSR-- but had in its interstices the seeds of the Great War of 1914; when Prussia became Germany under Bismarck.

The Metternichtian construct collapsed when colonial order and national greed for new colonies impinged Germany's needs for lebensraum.

The Pax Americana twin pillar construct in ME oil patch could know a similar fate under the pressure of the Iran/China/Russia axis now in the making; with hot spot currently in Syria.

Dear Henry's order could finish like that of his model for the same reasons when thieves fall out on greed and "ideology", the fake excuse of all hegemonists since the dawn of History.

History rhymes.

The issue of repositioning the neocon Bushist divide and rule Pax Americana strategy, and its disastrous consequences in Iraq and Afghan/pak via rampant exacerbation of past military plays-- by distancing it from the wahhabit camp and on a more Shia/Iran friendly footing-- is an interesting development that shows that the current Admin and US MIC leaders with "boots on ground experience" know that the blowback of pursuing that old route will be awesome and is virtually unsustainable (whatever Israel may say).

The resurgence of the Cold War with Russia will undoubtedly impact on US foreign policy and its too early to say how Crimea and other moves by Russia/China/Iran could change the US policy mix.

As for shale oil fracturing I don't think it will make the US into a net exporter of fossil fuels whatever the current hopium points to. ME Oil stays the N° 1 mainstay to world conventional energy needs along with Russia and Africa.

If America had spent as much money on goodwill and building honest open relationships around the globe over the last 60 years instead of funneling it all into the MIC and black ops security/spy technology the world would be a much more free, safe, wealthy and friendly place.......

The "jew media" are not what they claim. 95% are Khazars, not descendants of Jacob son on Isaac son of Abraham. In addition, those that are actually descended from Jacob (Israel) do NOT live by the law passed on by Moses (Mosaic Law), ie: Jubilee year every 50 years, animal sacrifice to recognize sins, etc.

These "Jews" are hiding behind "anti-semitism", while these "jews" are the most anti-semitic people ever to walk this Earth.

For what it's worth, the US is in the top 5 on the (WGI) World Giving Index. Russia's #138 and China's #147. And being that we have a much larger population than #1-4 combined, as a country we send the most money for charity of anyone by far.

You finally got to it. God I read the article thinking it was some globalist propaganda until the end. First off the wealthy don't think much in terms of national identity except when it is used to trick the poor people of the EU and the US. The Elite have a western empire. Money and finances are spread across the empire as one financial system. But because it was based on FRAUD and FRAUD has now been made legal by Banks and Western corporations the system is imploding. The Western Elite worked with the Saudis to bring down the World Trade Centers. All the records for how that went down still exist and can be made available when the time is right. All kinds of crap is about to happen because of the failure by the US justice department to prosecute the banks. They are so greedy that they have destroyed the system that supports them. Empires fail when they have to hire merceneries to fight their wars. Nobody wants to fight to support the criminal banking elite. Since most people in Brittan, the EU and the US hate the globalist take over of their nations the Elites Empire is pretty much headed into certain defeat and destruction unless the military quickly moves in to round up the Western Elite and restore the rule of law as well as national identity. FRAUD does not and cannot last for long. When the money goes it also goes from the military industrial complex. Ok I'll say it NATO forces you should get your shit together and go after the treasonous criminals that have taken over your nations or you, your children and our children are not going to have a future. The Elite do not have the ability at this time to do what they intend for you guys to do. The people can't defeat the system at this time because of what the Elite have done. But, you guys can and should. The globalist's system is headed for failure with or without the military industrial complex. Make your choice now. I could go on forever about Obama supposedly being the commander and chief but no need everything is so openly apparent these days. Not hope and change it is time to do the right thing.

only friends sociopaths have are sociopaths and eventually they fall out. but onto the next level as wealth and or power gained. there is always another mark ahead...they are not like you and I, but beware they are controlling you!

"Saudi Arabia has enjoyed a close relationship with the United States"

Oh yes. US = master. KSA = resentful servant waiting for the right time to take revenge. Close relationship.

The servant dares not strike openly. Instead, it secretly sponsors terrorism against the master, all over the world, and smiles, and waits.

It comes down to this: if KSA does not keep the oil flowing, the US will invade and/or otherthrow the House of Saud. When the oil runs out, the US intends to burn KSA the way the CIA burns a troublesome "asset" who has outlived his usefulness.

Of course there is a darker agenda. One more betrayal in such a long list of betrayals.

The Boyz are stealing the Saudis gold, they aren't our friends anymore so f*ck them. Besides, they need the gold to help cover for all those allocated, hypothecated, stolen accounts. Well, NATO can always invade another country, let's see, how much gold does Syria have?

Saudi our good allies who funded al queda and 9/11...or saudi the ones who were friends with the Tsarnov bros,.. or saudi our allies that raised the price of oil thru the roof back in the 70's... let the fucking ragheads fight their own fight with their own blood..the sunni they sent to syria who beheaded christians... those saudis??? buy a bomb from pakiland.... yeah and watch it explode on delivery... iran will USE THE BOMB the day after they have a delivery mechanism... so russia can give them that.. what our allies realize is that unless it directly threatens our strategic interest the only support they will get from us is a speech from kerry or biden... they will first have to protect themselves.. ussa under obama is NOT A RELIABLE PARTNER... obama is a liar and a supporter of the muslim brotherhood and al queda. that is his top priority. the rest he gives a shit about.

The usual sick agenda pushed by the author here - the best result would be open war between Saudi, Us and Israel - with a result of complete destruction of the current powers and ideologies pursued by the controllers of those nations and a popular revolution displacing them, and hanging them in the streets.

Certainly the Saudi power is very concentrated, and therefore very fragile - a few small explosions, a couple of assassinations and Saudi power would fall into perhaps more rational hands. The current Saudi radical royals are supported almost entirely by the US military, and religious extremists (ie. brainwashed idiots).

I do hope the Nexus of Evil - the controllers of US, Israel and Saudi - are destroyed by internal conflicts, along with the extremists ideologies - zionism, racial supremacism, world domination, class division, divine right of rule etc - all filthy notions.

Sorry,incompetence is no longer an option for those assessing the Obama administration
Malevolence is the only possible judgement for a regime entering its 6th year.
The campaign which announced its intent to fundamentally transform America must be judged on its merits,or lack thereof: in ever metric,it has failed.
Out with this miserable charlatan.
Down with this tyrannical regime.

i lived in saudi arabia very recently and left a different man. it only took one year of working for the saudi government in riyadh to show me the nature of saudis - greedy, corrupt, lazy, despising America and of such a conservative religous bent that they still chop people up on a regular basis - usually their maids and drivers.

when i was there i met many american converts and saudi worshippers - some working for the US Embassy. One guy i met was the strangest American i have ever met overseas...like an alien. he looked like an American (brooks brothers) but talked like a saudi. he even plans on being buried in saudi. they love the place.

after 9/11 we should have embarked on an moonshot engineering/energy independence program and never bought a barrel of saudi oil ever again. we would have been a much better country at this point.

"In and out of rivers, streams of death in life, whose banks were rotting into mud, whose waters, thickened with slime, invaded the contorted mangroves, that seemed to writhe at us in the extremity of an impotent despair. Nowhere did we stop long enough to get a particularlised impression, but the general sense of vague and oppressive wonder grew upon me. It was like a weary pilgrimage amongst hints for nightmares." - Joseph Conrad, Heart of Darkness, Part

Prince Charles doing his Saudi Sword Dance in Saudi - clearly his impression of Saudi is different from mine.

Iran's been 'building the bomb' since the 1970's supposedly. (No I don't think they're building a bomb. Yes I do think they want a turnkey solution like Japan).

Where is the "Now that the deal is in place, the Iranians are openly taunting the West with shouts of victory rather than assuring the world they have no intent to join the nuclear club."

The Lamestreet media would be ALL OVER any Iranian 'taunting' of the west if it supposedly occurred. Is Iran saying "we're going to continue building the bomb motherfkers"?

Then the article goes on to say Saudi is funding Pakistan to build the bomb? Hello 15 of 19 hijackers + OBL were Saudi, with Sharia law and Wahabism, who want to destroy the west, and yet they can fund a bomb, yet we're intent on bombing Iran? I think we need to look at who our allies are.

The ruling classes are criminally insane. Merely because they used to be the best at being dishonest, and backing that up with violence, does NOT mean that they are rational regarding what they are doing now! The ruling classes are like everyone else in having sets of habits, established by their history, and so, they tend to repeat the same action patterns: like stupid little monkeys with atomic bombs!

High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes =====economic death spiral.

Compounding the problem is the fact that a weak labour market means real wages drop - as they are across the world right now - that means everything is more expensive and your buying power is dropping at the same time.

Governments recognize this and are trying to offset with debt, easy lending (they are purposely inflating bubbles), lower interest rates and money printing.

Of course they will fail - because the disease is expensive oil.And there is no substitute

The economic death spiral will accelerate when the QE and ZIRP no longer have any effect and the confidence game collapses.

This moment will be known as the end of the industrial revolution by the few who survive.

This is not a Hollywood movie where the hero saves the day.This is the reality we are facing.

According to the results of a quantitative exercise carried out by the IEA in collaboration with the OECD Economics Department and with the assistance of the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

The path toward U.S. energy independence, made possible by a boom in shale oil, will be much harder than it seems. Just a few of the roadblocks: Independent producers will spend $1.50 drilling this year for every dollar they get back. Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency. http://www.bloomberg.com/news/2014-02-27/dream-of-u-s-oil-independence-slams-against-shale-costs.html

Robert Ayres, a scientist and professor at the Paris-based INSEAD business school, wrote recently that a "mini-bubble" is being inflated by shale gas enthusiasts. “Drilling for oil in the U.S. in 2012 was at the rate of 25,000 new wells per year, just to keep output at the same level as it was in the year 2000, when only 5,000 wells were drilled."http://www.forbes.com/sites/insead/2013/05/08/shale-oil-and-gas-the-contrarian-view/

"Tight oil is an important contributor to the U.S. energy supply, but its long-term sustainability is questionable. It should be not be viewed as a panacea for business as usual in future U.S. energy security planning."

“I look at shale as more of a retirement party than a revolution,” says Art Berman, a petroleum geologist who spent 20 years with what was then Amoco and now runs his own firm, Labyrinth Consulting Services, in Sugar Land, Tex. “It’s the last gasp.”

Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance.

According to the 2013 WEO, the total world oil supply in 2012 was 87.1m barrels a day, an increase of 11.9mbd over the 75.2mbd produced in 2000.

However, less than one-third of this increase was in the form of conventional crude oil, and more than two-thirds was therefore either what the IEA calls unconventional crude (light-tight oil, oil sands, and deep/ultra-deepwater oil) or natural-gas liquids (NGLs).

This distinction matters because unconventional crude has a higher cost than conventional crude, while NGLs have a lower energy density.

The IEA’s long-run cost curve has conventional crude in a range of $10-$70 a barrel, whereas for unconventional crude the ranges are higher: $50-$90 a barrel for oil sands, $50-$100 for light-tight oil, and $70-$90 for ultra-deep water. Meanwhile, in terms of energy content, a barrel of crude oil is worth 1.4 barrels of NGLs.

Threefold rise

The much higher cost of developing unconventional crude resources and the lower energy density of NGLs explain why, as these sources have increased their share of supply, the industry’s upstream capex has increased. But the sheer scale of the increase is staggering: upstream outlays have risen more than threefold in real terms over the past 12 years, reaching nearly $700bn in 2012 compared with only $250bn in 2000 (both figures in constant 2012 dollars).

Coinciding with the rise in US tight-oil production, most of this increase in upstream capex has occurred since 2005, as investments have effectively doubled from $350bn in that year to nearly $700bn in 2012 (again in 2012 dollars).

All of which means the 2013 WEO has the oil industry’s upstream capex rising by nearly 180 per cent since 2000, but the global oil supply (adjusted for energy content) by only 14 per cent. The most straightforward interpretation of this data is that the economics of oil have become completely dislocated from historic norms since 2000 (and especially since 2005), with the industry investing at exponentially higher rates for increasingly small incremental yields of energy.

The industry has been able and willing to finance such a dramatic increase in its capital investment since 2000 owing to the similarly dramatic increase in prices. BP data show that the average price of Brent crude in real terms increased from $38 a barrel in 2000 to $112 in 2012 (in constant 2011 dollars), which represents a 195 per cent increase, slightly greater in fact than the increase in industry capex over the same period.

However, looking only at the period since 2005, capital outlays have risen faster than prices (90 per cent and 75 per cent respectively), while in the past two years capex has risen by a further 20 per cent (the IEA estimates 2013 upstream capex at $710bn versus $590bn in 2011), while Brent prices have actually averaged about $5 a barrel less this year than in 2011.

Iran not a game changer

That prices have fallen slightly since 2011 while capex has risen by a further 20 per cent is a flashing light on the industry’s dashboard indicating that its upstream growth engine may finally be overheating.

Without a significant technological breakthrough reversing the geological forces that have driven the unprecedented increase in upstream investment over the past decade, prices will have to rise further in real terms from here or else capex – and with it future oil production – will fall.

It should also be emphasised that this vast increase in capex has occurred during a prolonged period of record-low interest rates. Once interest rates start rising again, this will put further pressure on the industry’s ability to make the massive capital outlays required to keep supply growing.

Of course, the diplomatic breakthrough achieved with Iran over the weekend could provide some much needed short-term relief to the market, as Iran’s exports could ultimately increase by up to 1.5m barrels a day if and when western sanctions were to be fully lifted. But this would not change the dynamics of the industry’s capex treadmill in any fundamental sense.

Even if global oil demand only grows at 1 per cent a cent a year, those extra barrels would be would be fully absorbed by the market within about 18 months. And that is probably how long it would take for Iran’s production and exports to return to pre-sanctions levels in any case.

Alternatively, if we take the IEA’s estimate that global production of conventional crude oil from all currently producing fields will decline by 41m barrels a day by 2035 (that is, by an average of 1.9m barrels a day per year), then Iran’s potential increase of 1.5m barrels a day would compensate for just 10 months of natural decline in global conventional-crude output.

In short, behind the hubbub of market hype about a new age of oil abundance, the toil for oil is in fact now more arduous and back-breaking than ever.

This should worry everybody, because with the evidence suggesting that consumers are reluctant to pay much above $110 a barrel, it is an open question what happens next to the industry’s investment plans and hence, over time, to the supply of oil.

Mark Lewis is an independent energy analyst and former head of energy research in commodities at Deutsche Bank; Daniel L Davis, a lieutenant colonel in the US Army, is co-author

Big oil counts the cost of tapping new discoveries – FT.com

“One hundred dollars per barrel is becoming the new $20, in our business.” With that pithy analysis, John Watson, chief executive of Chevron, summed up the oil industry’s plight.

As companies pursue the ever more challenging oil reserves that they need to increase or merely sustain their production, their costs have risen to the point that the most expensive projects, such as deepwater developments or liquefied natural gas plants, need an oil price of at least $100 a barrel to be commercially viable.

Now a growing number of oil executives are saying that has to change. As discussions at the IHS Cera Week conference in Houston made clear, cost-cutting is back at the top of the industry’s agenda.

The issue has come to a head after three years in which the price of crude has drifted down, in part because of the extra supply coming on to the market from the US shale oil boom, while costs have continued to rise.

The result has been a squeeze on margins, declining returns on capital, and underperforming share prices.

Chevron and ExxonMobil’s shares have both risen 11 per cent in the past three years, and Total’s by 8 per cent, while Royal Dutch Shell’s have fallen 2 per cent. In the same period the S&P 500 index rose more than 40 per cent.

Futures prices show oil is expected to fall further, with five-year Brent at about $91 a barrel, suggesting that the pressure on oil producers’ profits will intensify.

Shares in companies such as Schlumberger and Halliburton, which provide services to the big oil groups, have over the past five years comfortably outperformed their customers. Under mounting pressure from their shareholders, oil companies are being forced to act.

In part, the roots of the industry’s cost problem lie in part in the increasing technical difficulty of the new projects being developed, such as large LNG plants or offshore oilfields in deep water. They demand complex equipment such as drilling rigs, specialised materials such as sophisticated steel pipes, and highly-skilled engineers, all of which are in limited supply.

As Peter Coleman, chief executive of Woodside Petroleum of Australia, put it when explaining the soaring cost inflation in the country’s LNG projects: “Everybody jumped into the pool at the same time, and we’re all trying to fight for the same floatable toys.”

Paolo Scaroni, chief executive of Eni of Italy, argues that his rivals’ rising costs also reflect their failure to discover more easily-developed resources. Companies such as Exxon and Shell have been adding production in the oil sands of Canada and US shale, which generally have higher costs per barrel because of the need for techniques such as hydraulic fracturing to extract the resources from the shale, or processing to separate the oil from the sand.

Exploration is more risky, but offers higher returns, Mr Scaroni says. Because with oil sands and shale the resources are known, “you are sure of everything, but the point is profitability is lower than if you make a discovery”.

Christophe de Margerie, chief executive of Total, adds another explanation: companies – including his own – have lost sight of the need to control costs. When oil prices are rising, managers are tempted to relax on cost control because their projects will still be profitable.

“If you have $110 [per barrel], and the budget is at $100, it’s easier. You can say ‘we’ve made it’. But what about the ten dollars? Where are they? Gone with the wind,” he says. “That’s not the way engineers or commercial people should behave.”

All the large western oil companies have reached similar conclusions. Andrew Mackenzie, chief executive of BHP Billiton, the mining and energy group, suggests the oil companies have reached the same point the miners were at a couple of years ago: facing up to the need to improve productivity in an environment of weaker commodity prices.

Total, Chevron and Shell have announced cuts in capital spending, and were joined on Wednesday by Exxon. Several companies have been “recycling” projects: delaying them to try to work on improving their economics.

BP’s Mad Dog phase 2 development in the Gulf of Mexico, Chevron’s Rosebank oilfield in the Atlantic west of Shetland, and Woodside’s Browse LNG project in Western Australia are among the plans being reassessed.

Mr Coleman told the Houston conference that as originally planned Browse had an estimated budget of $80bn, which was “not a commercially acceptable risk”.

The prospect of an investment slowdown already appears to be having an impact. David Vaucher, an analyst at IHS, says the firm’s survey of oil and gas production costs shows they levelled off last year, in a sign that the industry is moving into a more sustainable balance.

Day rates for drilling rigs have started to fall, even for advanced deepwater rigs. The prospect of further falls has helped send shares in Transocean, one of the largest rig operators, down 20 per cent in the past 12 months.

However, Mr Vaucher observes that costs tend to be easier to raise than to cut.

At Total, Mr de Margerie still sees a lot of work to be done. He is promising a cost-saving plan throughout the company, a new process for designing projects to build in cost control right from the start, and reshaped relationships with service companies.

“You need to create a new culture,” he says. “Yes, safety first, yes environment. But also at the same time, yes cost is important. And to achieve a project with lower cost is good.”

Sorry L Todd Wood, I think you miss the mark big time on several issues.

First, shale oil is mostly hype. Shale was already known since the 70s, and only became relavent again once oil prices went up significantly. Even if oil prices stay the same (which is not assured given the economic demand for oil has been propped up by money printing), shale oil actually depletes very quickly and according to IEA the US shale oil boom has only a decade left. This is something that is apparently already well known by analysts (just search google), so shale oil is really just being spoon fed to the media.

As for Obama's deal with Iran, you could argue they are stuck. Iran had threatened they would close the straights of Hormuz, and there is no telling if they were provided the technology to do so by US rivals (such as Russia for example). If Iran ever materialized that threat, it would not matter how much shale oil the US can produce since the price would rise so much the US economy would be severely crippled. A war with Iran was simply not a viable option.

Finally, it does not matter what Saudi Arabia thinks and or wants, what matters is what the US can do. The truth is the US's hands are tied by its bad economy and its attempts to hide that from the rest of the world (rather than fix these issues head on). Eventually as more US adversaries begin to make gains against US interests (such as the deal with Iran or Russia's annexation of Crimea) it will begin to dawn on people just how vulenrable the US has become.